In this article from Fortune, the author tries to make the case that you don't know you're in a recession until months after it starts. The author writes:
Investing successfully is about looking ahead, while determining
whether we're in a recession involves looking behind. Way behind. We
won't know that a recession has started until months after it's begun.
I will agree that investing successfully is about looking ahead. This is true.
However, I disagree that in order to determine if we are in a recession, we have to look behind.
The writer then goes on to state at which point he considers a recession to have arrived:
Now, exactly what is a recession? Opinions vary. Many people think that
a recession is defined as two consecutive quarters in which "real"
gross domestic product - GDP adjusted for inflation - declines. If you
accept that definition, which I don't, you don't find out that a
recession is underway until six months - two calendar quarters - after
it has started. (Sorry, too late!) If you use what I consider the
proper definition - a declaration by the National Bureau of Economic
Research's business cycle dating committee that the economy has peaked
- you may have to wait even longer. Nevertheless, I prefer the NBER
version because it's the collective opinion of seven savvy people
rather than a rote formula.
If you use either of the two above methods, then yes, you do have to look behind to see if we are in a recession. But I would advise against relying on government statistics to find out if the recession has arrived.
A recession is a natural consequence of an artificial boom. Without the boom, there would be no recession. So the starting point is the boom.
Artificial booms are created by an inflation of the money supply. The Federal Reserve, through the process of holding down interest rates below market levels, increases the money supply by creating money out of thin air. This new money sets in motion major malinvestments in the economy.
A recession is the liquidation of the malinvestments created during the boom.
If you understand this, there is no reason to rely on government statistics, or the opinion of "seven savvy people." All you need to do is ask a simple question: "Are the malinvestments being liquidated?"
If the answer is "yes", then a recession has come to the rescue. The cure to the artificial boom has arrived. Capital moves into more productive and efficient hands, and the time becomes ripe for investing in the markets. If the answer is "no", i.e., the malinvestments of the boom are not being liquidated, it would be wise to stay away from the markets.
No need to look back (or way back)...The answer as to whether or not the recession has arrived is here and now.
Dec 27 2007, 10:02 AM